Annals of Poverty

Our Meaningless Measure of Poverty

The Census Bureau regularly calculates the number of people deemed to be “living in poverty” in the United States. The figures are reported in the media with great credulity. Here’s an article from the New York Times from September 2011 reporting the latest Census Bureau figures: 46.2 million people in poverty in the United States, constituting about 15% of the population. This is up substantially since the onset of the recession, let alone there hasn’t been any substantial decline in the percentage since the “war on poverty” began in the 1960s (Link). The NYT article is accompanied by the usual NYT quotes from activist organizations making not too subtle pleas for more government funding and programs to solve the problem. For example: “'We’re risking a new underclass,' said Timothy Smeeding, director of the Institute for Research on Poverty at the University of Wisconsin, Madison. 'Young, less-educated adults, mainly men, can’t support their children and form stable families because they are jobless,' he added."

46 million people and 15% of the population is a lot of people living in “poverty.” But then there are the equally regular reports, often coming from the conservative Heritage Foundation, that seem to contradict the idea that the people identified by the Census Bureau as living in poverty are actually living in a state of poverty as most people would understand the term. It seems that the Census Bureau reports also provide information on material well-being, and when you go through that information you come away scratching your head as to what they are talking about when they say “poverty.” From a February 2012 Heritage report:

• 80 percent of poor households have air conditioning.• Nearly three-fourths have a car or truck, and 31 percent have two or more cars or trucks.• Nearly two-thirds have cable or satellite television.• Half have a personal computer, and one in seven have two or more computers.• 43 percent have Internet access.• One-third have a wide-screen plasma or LCD television.

So what’s going on here? When we think of "poverty" we think of material deprivation -- hunger, poor quality housing, lack of good shoes or winter coats. There undoubtedly is much of that in the United States. But the Census Bureau measure of poverty is clearly not measuring that kind of material deprivation, or if it is measuring that to some degree, it is also throwing into the "poverty" definition many other things that do not involve material deprivation at all.

Instead, “poverty” as reported by the Census Bureau is a contrived result of an artificial definition. It is defined the way it is intentionally to make the number of people reported in “poverty” high and to keep it from ever being possible to make the number decrease. The definition sweeps in many people whom you would never think of as poor, and the Census Bureau data makes it impossible to separate out which of those reported in “poverty” are the really poor versus the contrived poor.

I plan a series of posts on the subject of this absurd definition, as well as on the equally contrived alternative definition put forth by the Census Bureau in 2012 to deflect legitimate criticism. The point is not that there is no poverty in the United States, but rather that we don't have a definition that provides any useful information about how much there is or about whether the policies being used to attack the problem are having any effect.

As a first example of the absurdity, I offer the observation that by the Census Bureau definition of "poverty," the very "poorest" people are highly unlikely to be "poor" at all in terms of material deprivation, and in fact are highly likely to be quite wealthy in the sense of ownership of valuable assets (as opposed to current income).

Does that seem like it can't possibly be right? It is because your attention is being mis-directed, as by a skillful magician. Please try to imagine, if you will, the “poorest” family that you can think of, and the set of circumstances that got them into that extreme poverty. I guarantee you that you will not come close to figuring out who the actual “poorest” family is by the Census Bureau definition. Done? OK, continue.

I’ll bet that you imagined a family consisting of one or more adults who would like to work but somehow can’t (possibly because of some horrible injury that renders them incapacitated) along with minor children. The adults in the family don’t work a single day in the year and have no other source of income or any assets with meaningful sale or cash value. How could you get poorer than that?

You didn’t even come close. First of all, a family in this position is almost certainly entitled to a cash stipend from the government, probably Social Security Disability, that will pay around $10,000 +/- per year. That’s not enough to get them out of poverty, but the $10,000 does count as income under the Census Bureau definition. There are plenty of people much “poorer” than this.

What you have failed to understand is that the Census Bureau defines "poverty" only in terms of current cash income, completely divorced from any assets that a family may own. It follows that merely not working can't get you to the bottom of the scale.

Here is the Census Bureau’s statement on the methodology it uses to measure “poverty.” It’s based on “money income.” Anything you get in “money income” counts: wages, welfare, social security, SSI, welfare, etc. Anything you get that is not “money income” does not count. They give a couple of rather big examples of what does not count: food stamps, public housing. They leave out many that are undoubtedly even more important: Medicare and Medicaid services, redemption of savings or of bonds, sales of assets at break even or at a loss, loan proceeds, gifts or support from family members not living together.

Now let’s consider who is at the lowest end of “poor” under this definition. First, consider Bob and Mary. They are 62 years old, and are starting retirement, so no more jobs. They own a house worth about $500,000 with no mortgage and have another $500,000 in savings. They’re millionaires! They can take Social Security now at about $20,000 per year, at 65 at about $24,000 per year, or at 70 at about $30,000 per year. Here’s what they decide: They’ll consume their savings at the rate of about $40,000 per year, and put off taking Social Security until they are 70. At today’s interest rates, their $500,000 in savings pays interest of only $2000 per year (0.4%). That’s their only “money income” Now we’re getting much closer to “poorest” than the people you were thinking of! Although they are millionaires by the measure of assets, Bob and Mary will be counted in the “poverty” statistics at the $2000 income level for eight full years until their Social Security begins. Meanwhile they own a $500,000 house with no debt and have the ability to spend about $40,000 per year essentially indefinitely.

But Bob and Mary still have about $2000 of “money income.” Surely we can get lower than that! How about zero? Easy! Consider Joe and Susan. They are also 62 and about to take early retirement, but instead of having cash savings, they have put all of their money into an expensive house (say $5 million) and life insurance (say, another $5 million of cash value). No “money income” there! How to live? Just borrow against the house and/or the life insurance – that doesn’t count as “money income”! Joe and Susan can easily put together a spending plan of well over $100,000 per year, without any danger of running low during their remaining lives; but under the Census Bureau definition, their “money income” is a flat zero for the next eight years. That’s what the New York Times calls “profound poverty.”

Does this seem like a preposterous scenario? It’s actually brilliant tax planning if you have a valuable asset that, however, pays no current cash income. Exhibit A was the family that owned the LA Dodgers, an asset that reported operating losses every year (although the team was recently sold for over $2 billion). They lived the super high life (in excess of $100 million over several years) in substantial part by borrowing against the team. OK, this caused some problems when they decided to get divorced.

But, believe it or not, we’re still not at the bottom, or even close. Why should zero be the lower limit for income? Is it possible to have serious negative income, like, say, hundreds of thousands of dollars per year? Can anybody say “Dewey & LeBoeuf”? I don’t know exactly how Dewey’s financial statements are going to work out for 2012, but it’s hard to imagine any result other than hundreds of thousands of dollars per partner of negative ordinary income. Now that’s “poverty”! (Many ex-Dewey partners will offset this negative number by working at new jobs during 2012; but some will decide to retire, and others may well not earn enough to get back to zero.) Of course, any long time Dewey partner is highly like to live in a big house (or maybe two houses), have multiple cars, nice vacations, etc. More broadly, anyone who has a business that is treated as a pass-through for tax purposes and has operating losses during the year has negative income; and the larger the business and the larger the loss, the larger the negative number can be. Somewhere in the US, there is someone who owns a very large and valuable business that for whatever reason is losing in excess of $10 million this year. That guy is the champion of “poverty.” But as I said, in order to be really, really “poor,” you have to be really, really rich!

How much are the Census Bureau poverty statistics distorted by the inclusion of asset millionaires? It is impossible for me to tell from anything I can find on their website. If anyone has any pointers for me I would appreciate it. Early retirees who consume savings for a few years before Social Security could easily be one category with significant numbers. More about other such categories in future posts.